Objective information about retirement, financial planning and investments

 

How Much Apple Stock Do You Really Own?

Share

Apple (AAPL) stock has been a great investment over the years. Based upon its stock price and the number of shares outstanding it is the largest U.S stock based upon market capitalization. This means it is the largest holding in many popular index mutual funds and ETFs. This can lead to significant stock overlap in your portfolio if you aren’t aware of the underlying holdings in the funds and ETFs you own.

Chuck Jaffe wrote an excellent piece for Market Watch several years ago discussing the impact that a significant drop in Apple stock had on a number of mutual funds that hold large amounts of Apple. He cited a list of funds that had at least 10% of their assets in Apple.  On a day when Apple stock fell over 4% these funds had single day losses ranging from 0.22% to 2.66%.

The point is not to criticize mutual fund managers for holding large amounts of Apple, but rather as a reminder to investors to understand what they actually own when reviewing their mutual funds and ETFs.

Major price gains

Apple stock gained over 88% in 2019 and has an average annual gain in excess of 32% for the 15-years ending December 31, 2019. For index funds and ETFs whose holdings are market-cap weighted, these types of gains mean that the percentage of the fund in Apple stock has increased as well.

Percentage of Apple stock in major funds and ETFs

A number of index ETFs and mutual funds counted Apple as a significant holding as of December 31, 2019. The following percentage of assets for each fund are from Morningstar.

  • ishares Russell 1000 Growth ETF 8.53%
  • Vanguard Growth Index Investor 8.17%
  • Fidelity Growth Company 5.98%
  • SPDR® S&P 500 ETF Trust 4.57%
  • iShares Core S&P 500 ETF 4.57%
  • Fidelity 500 Index 4.34%
  • Vanguard 500 Index Investor 4.32%

In addition, it is also a dominant holding in several tech-related index funds, including:

  • Technology Select Sector SPDR® ETF 19.72%
  • Vanguard Information Technology ETF 17.53%
  • Invesco QQQ Trust 11.51%

Stock overlap 

In the late 1990s a client had me do a review of their portfolio as part of some work I was doing for the executives of the company. He held 19 different mutual funds and was certain that he was well-diversified.

The reality was that all 19 funds had similar investment styles and all 19 held some of the popular tech stocks of the day including Cisco, Intel and Microsoft. As this was right before the DOT COM bubble burst in early 2000 his portfolio would have taken quite a hit during the market decline of 2000-2002.

This type of situation could easily be the case today with stocks in companies like Apple, Microsoft, Alphabet (Google’s parent), Facebook and others. Tools like Morningstar can help investors look under the hood of various ETFs and mutul funds to gauge the amount of stock overlap across their portfolio.  (The prior link is an affiliate link. I may receive compensation if you purchase their service at no extra cost to you)

Understand what you own 

If you invest in individual stocks you do this by choice. You know what you own. If you have a concentrated position in one or more stocks this is transparent to you.

Those who invest in mutual funds, ETFs and other professionally managed investment vehicles need to look at the underlying holdings of their funds. Excessive stock overlap among holdings can occur if your portfolio is concentrated in one or two asset classes. This is another reason why your portfolio should be diversified among several asset classes based upon your time horizon and risk tolerance.

As an extreme example, someone who works for a major corporation might own shares of their own company stock in some of the mutual funds and ETFs they own both inside their 401(k) plan and outside. In addition, they might directly own shares of company stock within their 401(k) and they might have stock options and own additional shares elsewhere. This can place the investor in a risky position should their company hit a downturn that causes the stock price to drop. Even worse if they are let go by the company not only has their portfolio suffered but they are without a paycheck from their employer as well.

The Bottom Line 

Mutual fund and ETF investors may hold more of large market capitalization stocks like Apple and Microsoft than they realize due to their prominence not only in large cap index funds but also in many actively managed funds. It is a good idea for investors to periodically review what their funds and ETFs actually own to ensure that they are not too heavily concentrated in a few stocks, increasing their portfolio risk beyond what they might have expected.

Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring regarding the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

 

Social Security and Working – What You Need to Know

Share

In today’s world of early or semi-retirement, many people wonder when they should begin taking their Social Security benefits. The combination of Social Security and working can complicate matters a bit. You can begin taking your benefit as early as age 62, but that is not always the best choice for many retirees. If you are working either at a job where you are employed or some sort of self-employment, you need to analyze the pros and cons based on your situation.

Full retirement age

 Your full retirement age or FRA is the age at which you become eligible for a full, unreduced retirement benefit. FRA is an important piece in understanding the potential implications of working on your Social Security benefit.

Your FRA depends on when you born:

  • If you were born from 1943 -1954 your full retirement age is 66
  • If you were born in 1955 your FRA is 66 and two months
  • If you were born in 1956 your FRA is 66 and four months
  • If you were born in 1957 your FRA is 66 and six months
  • If you were born in 1958 your FRA is 66 and eight months
  • If you were born in 1959 your FRA is 66 and ten months
  • If you were born in 1960 or later your FRA is 67

Source: Social Security

Social Security and working

If you are working, collecting a Social Security benefit and younger than your FRA your benefits will be reduced by $1 for every $2 that your earned income exceeds the annual limit which is $18,240 for 2020. Earned income is defined as income from employment or self-employment.

During the year in which you reach your full retirement age the annual limit is increased. For 2020 this increased limit is $48,600. The reduction is reduced to $1 for every $3 of earnings over the limit.

This chart shows the monthly reduction of benefits at three levels of earned income for 2020.

                                         Reduction of Benefits – 2020

Age $25,000 earned income $50,000 earned income $75,000 earned income
Younger than FRA $282 per month $1,323 per month reduction $2,365 per month reduction
Year in which you reach FRA No reduction $39 per month reduction $733 per month reduction
FRA or older No reduction No reduction No reduction

Source: Social Security

Temporary loss of benefits

The loss of benefits is temporary versus permanent. Any benefit reduction due to earnings above the threshold will be recovered once you reach your FRA on a gradual basis over a number of years.

However, your benefit will be permanently reduced by having taken it prior to your FRA. This means that any future cost-of-living adjustments will be calculated on a lower base amount as well.

One other point to keep in mind, continuing to work can add to your Social Security wage base, somewhat offsetting the permanent benefit reduction from taking Social Security early.

A one-time do-over 

Everyone is allowed a one-time do-over to withdraw their benefit within one year of the start date of receiving their initial benefit. This is allowed once during your lifetime.

One reason you might consider this is going back to work and earning more than you had initially anticipated. This is a way to avoid having your benefit permanently reduced. You would reapply later when you’ve reached your FRA, or your earned income is under the limits. Your benefit would increase due to your age and any cost-of-living increases that might occur during this time.

When you do take advantage of this one-time do-over, you must pay back any benefits received. This includes not only any Social Security benefits that you received, but also:

  • Any benefits paid based upon your earnings record such as spousal or dependent benefits.
  • Any money that may have been withheld from your benefits such as taxes or Medicare premiums.

Social Security and income taxes 

Regardless of your age or the source of your income, Social Security benefits can be taxed based upon your income level. This could certainly be impacted from income earned from employment or self-employment, but it also includes other sources of taxable income such as a pension or investment income.

The amount of the benefit that is subject to taxes is based upon your combined income, which is defined as: adjusted gross income + non-taxable interest income (typically from municipal bonds) + ½ of your Social Security benefit.

The tax levels are:

Tax filing status Combined income % of your benefit that will be taxed
Single $25,000 – $34,000 Up to 50%
Single Over $34,000 Up to 85%
Married filing jointly $32,000 – $44,000 Up to 50%
Married filing jointly Over $44,000 Up to 85%

Source: Social Security

The Bottom Line 

The decision when to take your Social Security benefit depends on many factors. If you are working or self-employed you will want to consider the impact that your earned income will have on your benefit.

You should also understand that your benefits can be subject to taxes at any age over certain levels of combined income, regardless of the source of that income.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring regarding the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo by Sharon McCutcheon on Unsplash

Retirement Plan Contribution Rates and Limits – 2020

Share

With the new year upon us, it’s a good time to be sure you understand the contribution rates and limits for various retirement plan options so you can contribute as much as possible. As you look at your financial planning for 2020, you will want to maximize your retirement contributions to meet your retirement savings goals. Here are the limits for some popular retirement savings vehicles.

401(k) 

The contribution limits for 2020 are:

  • $19,500
  • $26,000 for those who will be 50 or over at any point during the year, including a $6,500 catch-up contribution.

These same limits apply to those of you who have access to a 403(b) plan via your employer.

The limits are slightly different for 457(b) plans offered by some governmental entities and other non-profits. The basic contribution limits are the same as for the 401(k) and the 403(b). However, for participants who have not contributed the maximum amounts in prior years, there is a special catch-up contribution limit that increases to a maximum of $39,000 in 2020 for those within a few years of the plan’s retirement age. If this describes your situation check with the plan administrator to see if you are eligible.

Health Savings Accounts

Health savings accounts (HSA) are another option that is increasingly being used as a retirement savings vehicle and should be considered by those of you who are eligible via participation in a high-deductible medical insurance plan.

For 2020, high-deductible medical plan is one with deductibles of at least:

  • $1,400 for individuals
  • $2,800 for a family

The maximum HSA contribution rates are:

  • $3,550 for an individual
  • $7,100 for a family
  • There is a $1,000 additional catch-up contribution available for those age 55 or over

An HSA is a great way to save for retirement medical costs as the money deferred can be carried over from one year to the next. Once you retire, the money can be used for either qualified medical expenses or treated like an IRA. Contributions are made on a pre-tax basis, withdrawals for qualified medical expenses are tax-free.

While you can use the money to reimburse yourself for covered medical and dental costs at any point in time, the real power of an HSA is the ability to use the money as an additional retirement savings vehicle. The key is to cover any out-of-pocket medical costs from other sources while you are working.

IRA 

The total contribution limits for IRAs remain unchanged from 2019:

  • $6,000
  • An additional $1,000 catch-up contribution for those who will be 50 or over at any point during 2020.

These contribution limits are totals for contributions across both traditional and Roth IRAs, as well as for both pre-tax and after-tax contributions.

Here are some additional IRA limits/rules to be aware of in 2020:

Roth IRA contribution limits and phase-outs 

If your filing status is single:

  • The phase-out in the amount that can be contributed begins at an income level of $124,000.
  • The phase-out range extends to $139,000 no Roth IRA contributions can be made at income levels above this.

If your filing status is married filing jointly (or you are a qualified widow or widower):

  • The phase-out in the amount that can be contributed begins at an income level of $196,000.
  • The phase-out range extends to $206,000 no Roth IRA contributions can be made at income levels above this.

As an example of how the phaseout works, a single filer with income of $131,500 could contribute $3,000 to a Roth IRA or $3,500 if they are 50 or over. This person can still contribute the full $6,000 or $7,000 maximum to an IRA, the remainder would need to be made to a traditional IRA on a pre-tax or after-tax basis depending upon their situation.

Income in this case is based upon modified adjusted gross income (MAGI) which is a modified version of the adjusted gross income (AGI) figure found on your tax return.

Traditional IRA pre-tax contribution income limits 

For those of you who are covered by a workplace retirement plan (whether or not you contribute) such as a 401(k), there are income limits above which you can’t make a pre-tax contribution. For 2020 those income limits are:

If your filing status is single:

  • The phase-out in the amount that can be contributed on a pre-tax basis begins at an income level of $65,000.
  • The phase-out range extends to $75,000; no pre-tax IRA contributions can be made at income levels above this.

If your filing status is married filing jointly (or you are a qualified widow or widower):

  • The phase-out in the amount that can be contributed begins at an income level of $104,000.
  • The phase-out range extends to $124,000; no pre-tax IRA contributions can be made at income levels above this.

If you are not covered by a retirement plan at work, then there are no income limits restricting your ability to contribute to a traditional IRA on a pre-tax basis.

If you are not covered by a workplace retirement plan, but your spouse is, the phase-out limits for pre-tax contributions start at $196,000 and extend to $206,000.

For those whose income may limit or eliminate their ability to contribute on a pre-tax basis, you are still eligible to contribute to a traditional IRA on an after-tax basis. You can mix and match between traditional and Roth IRA contributions, as well as between pre and post-tax contributions within the $6,000/$7,000 maximums for total IRA contributions.

SIMPLE IRA

A SIMPLE IRA plan is a business retirement plan that offers less administrative and paperwork burdens for small business with 100 or fewer employees. Self-employed individuals can also use a SIMPLE IRA.

For 2020, the contribution limits have been raised to $13,500, with those who are 50 or over eligible to contribute an additional $3,000. In addition, there is a mandatory employer contribution of either a 3% match or a 2% non-elective contribution. 

Self-employed retirement plans 

Solo 401(k) plans 

Solo 401(k) plans are available to a business owner, their spouse who works in the business and to any partners in the business. Solo 401(k) plans cannot include any other employees and are not the right choice for businesses with employees.

The contribution limits for 2020 for solo 401(k) plans are:

  • The same $19,500/$26,000 employee contribution limits as a regular 401(k) plans.
  • The maximum combined employer and employee contributions for 2020 are $57,000 and $63,500 for those 50 and over. The employer profit sharing contribution is based on a maximum of 25% of compensation up to the total $57,000/$63,500 limits.

SEP-IRA 

Contributions to a SEP-IRA are made by the employer only. Employee deferrals are not permitted. While a SEP-IRA plan can include employees, as a practical matter these plans can get expensive if employees are included.

Contribution limits for 2020 are:

  • The lesser of 25% of compensation or $57,000. There are no catch-up contributions for those who are 50 or over.

Note there are other options for the self-employed including a small-business 401(k) and a defined benefit pension plan depending upon your situation, including your business’ size, cash flow and other factors. 

The Bottom Line

These popular retirement savings options are all solid vehicles to help you accumulate a retirement nest egg. This is the time to look at your situation, decide how much you can contribute, and which options fit your situation. Studies have shown that the biggest determinant of the size of your retirement nest egg is the amount that you’ve saved.

What are you waiting for? The best time to start saving for retirement (or to increase your retirement contributions) is today.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo courtesy of sasint

Stock Market Highs and Your Retirement

Share

After a rough year in 2018, the S&P 500 and the Dow sit in record territory. So far in 2019, stocks have staged a very nice recovery with the S&P 500 up about 29% year-to-date. These gains are in spite of the questions and issues surrounding the Trump administration, the threat of trade wars with a number of countries and uncertainty about what the Fed will do with interest rates.

Difference Between Stocks and Bonds

At some point we are bound to see a stock market correction of some magnitude, hopefully not on the order of the 2008-09 financial crisis. As someone saving for retirement what should you do now?

Review and rebalance 

During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.” The PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced losses well in excess of the market averages were victims of their own over-allocation to stocks. This might have been their own doing or the result of poor financial advice.

This is the time to review your portfolio allocation and rebalance if needed.  For example, your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you are at increased risk should the market head down.  It may be time to consider paring equities back and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to review your situation and to get an up-to-date plan in place.. Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is an ideal time to review it and see where you are relative to your goals. Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point? If so, this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

It is said that fear and greed are the two main drivers of the stock market. Some of the experts on shows like CNBC seem to feel that the market still has some upside. Maybe they’re right. However, don’t get carried away and let greed guide your investing decisions.

Manage your portfolio with an eye towards downside risk. This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash. What it does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your retirement goals, your time horizon and your risk tolerance.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Phillip Taylor PT

 

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

Share

One of the best tax deductions for a small business owner is funding a retirement plan. Beyond any tax deduction you are saving for your own retirement.  As a fellow small businessperson, I know how hard you work.  You deserve a comfortable retirement. If you don’t plan for your own retirement who will? Two popular small business retirement plans are the SEP-IRA and Solo 401(k).

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

SEP-IRA vs. Solo 401(k)

SEP-IRA Solo 401(k)
Who can contribute? Employer contributions only. Employer contributions and employee deferrals.
Employer contribution limits The maximum for 2019 is $56,000 and increases to $57,000 for 2020. Contributions are deductible as a business expense and are not required every year. For 2019, employer plus employee combined contribution limit is a maximum of 25% of compensation up to the maximums are $56,000 and $62,000, respectively. For 2020 these limits increase to $57,000 and $63,500. Employer contributions are deductible as a business expense and are not required every year.
Employee contribution limits A SEP-IRA only allows employer contributions. Employees can contribute to an IRA (Traditional, Roth, or Non-Deductible based upon their individual circumstances). $19,000 for 2019. An additional $6,000 for participants 50 and over. In no case can this exceed 100% of their compensation. The limits for 2020 increase to  $19,500 and $26,000 respectively.
Eligibility Typically, employees must be allowed to participate if they are over age 21, earn at least $600 annually, and have worked for the same employer in at least three of the past five years. No age or income restrictions. Business owners, partners and spouses working in the business. Common-law employees are not eligible.

Note the Solo 401(k) is also referred to as an Individual 401(k).

  • While a SEP-IRA can be used with employees in reality this can become an expensive proposition as you will need to contribute the same percentage for your employees as you defer for yourself. I generally consider this a plan for the self-employed.
  • Both plans allow for contributions up your tax filing date, including extensions for the prior tax year. Consult with your tax professional to determine when your employee contributions must be made. The Solo 401(k) plan must be established by the end of the calendar year.
  • The SEP-IRA contribution is calculated as a percentage of compensation. If your compensation is variable the amount that you can contribute year-to year will vary as well. Even if you have the cash to do so, your contribution will be limited by your income for a given year.
  • By contrast you can defer the lesser of $19,000 ($25,000 if 50 or over) or 100% of your income for 2019 and $19,500/$26,000 for 2020 into a Solo 401(k) plus the profit sharing contribution. This might be the better alternative for those with plenty of cash and a variable income.
  • Loans are possible from Solo 401(k)s, but not with SEP-IRAs.
  • Roth feature is available for a Solo 401(k) if allowed by your plan document. There is no Roth feature for a SEP-IRA.
  • Both plans require minimal administrative work, though once the balance in your Solo 401(k) account tops $250,000, the level of annual government paperwork increases a bit.
  • Both plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. For the Solo 401(k) you will generally use a prototype plan. If you want to contribute to a Roth account, for example, ensure that this is possible through the custodian you choose.
  • Investment options for both plans generally run the full gamut of typical investment options available at your custodian such as mutual funds, individual stocks, ETFs, bonds, closed-end funds, etc. There are some statutory restrictions so check with your custodian.
  • For those wishing to invest in alternative assets inside of their SEP or solo 401(k), a number of self-directed retirement plan custodians offer this option.

Both plans can offer a great way for you to save for retirement and to realize some tax savings in the process. Whether you go this route or with some other option I urge to start saving for your retirement today 

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit Flickr